The impact of the recession on the labor market in the Inland Empire has been severe. The unemployment rate in the Inland Empire rose from 5.2% in May 2007 to 14.6% in October 2009. This increase of 9.4% in a span of little over two years is unprecedented in recent decades. What is worse is the deterioration of the labor market in the Inland Empire compared to Greater Los Angeles (defined as Los Angeles and Orange Counties), the rest of California and the United States as a whole. Even the recent slight improvement in the region’s unemployment numbers is largely due to discouraged workers giving up their search for jobs and simply dropping out of the labor force. San Bernardino and Riverside Counties have been affected roughly equally in terms of unemployment in the current recession, with the September 2009 unemployment rate hitting 13.6% and 14.7% in each county respectively. While the local situation is certainly dire, the Inland Empire is far from the most severely impacted metropolitan area in the United States. For example, in August 2009 the City of Detroit saw unemployment rise to 28.9%, roughly three times the national average. But as in Detroit, where the dying American auto industry is unlikely to recover in the near future, the Inland Empire will face a struggle to emerge from the recession. We believe that the Inland Empire’s return to full employment will require a fundamental structural shift in the region’s economic base; in particular, construction will not play the same role it has in the recent past.

From the official onset of the recession in the United States in December 2007 through September 2009, the number of people employed inside the Inland Empire has decreased by more than 11%. This decline was far greater than employment losses of 6.6% in Greater Los Angeles, 6.5% in the state as a whole, and 5.3% in the country.

Labor Market Ties between the Inland Empire and the Greater L.A. Area
The Inland Empire’s geographic proximity to the Greater Los Angeles metropolitan area ties its economy closely to the fate of Los Angeles and Orange Counties. We estimate that almost a quarter of the Inland Empire’s labor force commutes for work in Greater Los Angeles. (A small number of workers travels daily to San Diego for work, and we will include these workers implicitly in our arguments about Los Angeles commuters.) As there are no restrictions to commuting between the two regions, the situation resembles the relationship between Connecticut and New York City, or between areas of Virginia and Maryland and Washington D.C.

At first, this sounds encouraging: the large percentage of Inland Empire residents working in Greater Los Angeles suggests that, if Greater Los Angeles recovers, so will the Inland Empire. The data show, however, that while relative unemployment parity persisted between the two regions for the majority of the last decade, since the onset of the current recession, unemployment in the Inland Empire has fared worse than its neighbors to the west.

The current unemployment situation thus resembles what we observed following the recession of the early ’90s. If we determine that recent labor market developments are similar to that episode, then we will not expect unemployment levels in the Inland Empire to return to normalcy for possibly a decade, but certainly not for at least five years. Of course, this assessment hinges on the assumption that the Greater Los Angeles area will turn the corner sooner than the Inland Empire. A recovery in Greater Los Angeles, then, will not be sufficient to pull the Inland Empire out of recession.

Structural Differences in the Composition of Employment
The severity of the local situation is underscored by the fact that 80% of the increase in the Inland Empire’s unemployment rate has resulted from workers losing employment inside the region. These job losses have totaled approximately 138,000, or almost 11% of all existing jobs in the Inland Empire prior to the onset of the current recession.

Moreover, these figures actually understate the unemployment crisis in the Inland Empire. By taking into account workers who are discouraged by the poor state of the job market, we estimate that the actual number of unemployed in the region is between 170,000 and 175,000, with the majority of job losses suffered by those employed locally, not those commuting to Greater Los Angeles. Since this finding is crucial for an understanding of the current economic and labor market situation and the potential for a recovery, let us stress the point again: residents of the Inland Empire who work outside of Greater Los Angeles are not losing jobs at the same rate as people who both live and work in the Inland Empire. There must be significant differences, then, between the composition of employment in the Inland Empire and the neighboring areas. These structural differences should explain the divergence in employment levels. This, indeed, is what we find.

Table 1 compares the the composition of employment in the Inland Empire and Greater Los Angeles. Not surprisingly, farming is a more important sector in the Inland Empire, but too small to explain the respective job losses. As a result, we will focus on the larger sectors.

We see the most glaring difference between the two regions when we compare construction with professional and management plus FIRE (finance, insurance, and real estate). The construction industry’s share of the job market is three times greater in the Inland Empire than in Greater Los Angeles; conversely, management and financial services account for 30% more of the job market in L.A. than in the Inland Empire. Job losses during the current recession for the Inland Empire have been most severe in the construction industry, totaling over 133,000 jobs lost, or 44% of all jobs in construction in the Inland Empire prior to the onset of the recession. Those 133,000 lost jobs in construction are so significant that they account for 77%, or roughly three out of every four, of all jobs lost in the Inland Empire since the onset of the recession. Inland Empire job losses in financial services, on the other hand, have totaled only 26,000, or close to 16% of jobs that existed in that industry prior to the recession.

It is clear then that the Inland Empire has been much more dependent than Greater Los Angeles on employment in the construction sector, and this difference largely explains the divergence of the unemployment rates between the two geographic areas. The difference in the composition of employment also explains why commuters have fared better than those who work in the Inland Empire. Construction workers tend to take jobs locally rather than out of the region. The Greater Los Angeles area has significantly more financial service jobs, and while this sector has also experienced employment declines following the fallout from the financial crisis, people working in this sector have not lost jobs on the same scale as have construction workers.

Prospects for a Jobs Market Recovery
If the Inland Empire is going to recapture the low unemployment rates of the mid-2000s, the region’s economy will have to undergo a fundamental shift in the composition of employment. Construction job losses, by far the largest contributor to unemployment in the Inland Empire, cannot be remedied without a significant recovery in the local housing market. But as further analysis in Inland Empire Outlook indicates, a local housing recovery is not going to occur in the near future. Accordingly, either Inland Empire residents must become even more dependent on commuting to jobs in the Greater Los Angeles area, or new local growth sectors must emerge. The next section will shed more light on this possibility by looking at Inland Empire output and its sectoral composition.